This past week we’ve seen a significant reduction or even outright elimination of many of the downside risks that have created clouds of uncertainty both in Washington and in financial markets over the past several months. The most substantial clarifying event was the announcement of the Phase 1 deal between China and the U.S.

However, we would caution investors against assuming that all policy uncertainty has been eliminated.

A fragile truce

While we will not likely see the details of the “skinny deal” until January, last week’s agreement between the world’s two largest economies is no doubt a welcome development. It represents not only a reprieve in escalation (i.e., no additional December tariffs), but also a small de-escalation (tariff rates on $120 billion of goods were cut from 15% to 7.5%) and some movement on issues such as intellectual property and goods purchases.

With that said, in spite of the Phase 1 deal, substantial tariffs (e.g., 25% on $250 billion of Chinese goods) will remain, and we would temper expectations for a Phase 2 deal given how difficult the easier Phase 1 deal has been to complete and because many of the knottier, harder-to-agree-on structural issues have been shelved for Phase 2 negotiations (e.g., the subsidization of state-owned enterprises, or SOEs). As such, we expect tariffs to remain on at least some Chinese imports for the foreseeable future.

We would also caution that in spite of the agreement, the risk that tensions flare up with China in the new year still exists, especially if China fails to follow through on its commitment of goods purchases – commitments it has said it would adhere to only if there is market demand and conditions supported them. As such, we would characterize the Phase 1 deal as welcomed but more of a fragile truce than a permanent settlement.